Rally fades as fears of Washington gridlock return

FILE -In this Thursday, Nov. 8, 2012, file photo, Robert Nelson II of Barclays, left, and Fady Tanios of Raven Securities work on the floor of the New York Stock Exchange, in New York. (AP Photo/Henny Ray Abrams)

NEW YORK (AP) — An early rally faded on Wall Street after President Barack Obama said he would stick to his pledge to seek higher taxes from the wealthy as part of his plan to reduce the U.S. government’s budget deficit.

Investors worried that his position, which is opposed by many Republicans in Congress, could augur more political wrangling in Washington and the possibility that Congress won’t act in time to avoid a series of drastic spending cuts and tax hikes that are set to kick in at the beginning of next year.

The Dow Jones industrial average had been up as much as 79 points before 1 p.m., when Obama began speaking. Much of the gain came after House Speaker John Boehner made his own remarks on the “fiscal cliff” issue late in the morning.

Most of the Dow’s gain evaporated within an hour. As of 3 p.m. the Dow was up nine points at 12,821. The Standard & Poor’s 500 index was up five points at 1,382 and the Nasdaq composite was up 15 points at 2,911.

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“We will get a compromise with the fiscal cliff,” said Chris Bertelsen, the Chief Investment Officer at Global Financial Private Capital, based in Saratosa, Florida. “But it could well be the conventional U.S. political way of doing it - the last minute type of stuff - in which case the markets will be haunted by it until the point it happens.”

The market is coming off its worst two-day slide in a year. The Dow average plunged 434 since President Barack Obama won re-election as investors turned their focus to a deadline at the end of the year for Congress to act on reducing the budget deficit.

If it doesn’t, the deep spending cuts and tax increases will occur automatically, potentially derailing the U.S. economy. The Congressional Budget Office said Thursday that the measures, if implemented, would likely push the economy back into recession.

The dimming outlook for Europe also weighed on markets this week. The European Commission, the executive arm of the European Union, slashed its forecast for economic growth in the region Wednesday.

The yield on the 10-year Treasury note rose to 1.62 percent from 1.61 percent late Thursday.

Among stocks making big moves:

— Online deals company Groupon slumped $1.17 to $2.75 after the company disclosed late Thursday that it was hurt by the economic problems in Europe.

— J.C. Penney dropped $1.33 to $20.36 after the company reported a loss that was larger than investors were expecting. Shoppers have been abandoning the store after it got rid of blockbuster sales in favor of everyday low prices.

— Kayak Software surged $8.63 to $39.67 after the company said it had agreed to be bought by rival travel website Priceline.com.